Updated: Jan 2
December 22, 2022 | Premium Service | Earlier this week, the Government National Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA) exercised their legal authority to seize government-insured reverse mortgages from the estate of Reverse Mortgage Funding (RMF), a lender that filed bankruptcy November 30th. The US government now owns the largest reverse lender in the country. We previously reported on this event of default for subscribers to our Premium Service (“RMF Bankruptcy Signals Systemic Risk in GNMA Market”).
These involuntary transfers and extinguishment of servicing rights by GNMA and FNMA make RMF the most significant event of default in the government loan market since the collapse of Taylor, Bean & Whitaker in 2011. This busted auction and asset seizure of home equity conversion mortgage (HECM) loans involves banks and non-banks, and may be a precursor of larger disruptions in the credit markets. But the Federal Open Market Committee ultimately must take the blame for this widening mess.
The unraveling of the liquidity in the reverse space began with non-agency products, which lost liquidity first and foremost as the Fed raised interest rates hundreds of basis points, widened spreads and boosted volatility 2x. This added to pressure on the liquidity of RMF and the industry as a whole. Mortgage banks face an already difficult market environment due to low origination volumes and increasingly selective buyers of mortgage paper like HECM tails.
“The transfer of servicing for RMF loans should have minimal direct impact on affected borrowers," Ginnie Mae President Alanna McCargo said in a statement. "Borrowers will receive a notification about the transfer of servicing as required by law, but that will not affect the payment schedule and borrowers should expect to continue to receive payments as usual.”